The Effectiveness of Public Enforcement: Evidence from the Resolution of Tunneling in China

58 Pages Posted: 11 Sep 2014

See all articles by Lars Helge Hass

Lars Helge Hass

Lancaster University - Management School

Sofia Johan

Florida Atlantic University - Finance; Tilburg Law and Economics Center (TILEC)

Maximilian A. Müller

WHU - Otto Beisheim School of Management

Date Written: July 27, 2013

Abstract

This paper examines the effectiveness of public enforcement by studying the effects of regulatory intervention to curb tunneling through intercorporate loans in China. Specifically, we explore whether public enforcement efforts in 2006 (blacklisting and sanctions) resulted in less tunneling, and ultimately in increased performance for tunneling firms. We show that tunneling is among the dominant factors increasing the likelihood of becoming blacklisted. We also find that firms’ tunneling mechanisms decreased significantly after the regulatory shock, and that their performance increased significantly compared to non-tunneling firms after the regulatory shock. Finally, we find a positive market reaction to the public announcement of tunneling both for firms that have been blacklisted and other tunneling firms that are not blacklisted. Collectively, These results suggest that public enforcement in the presence of a credible threat succeeds in deterring the effect on tunneling behavior in China.

Keywords: Corporate Governance, Tunneling, Enforcement

JEL Classification: G15, G38, K22

Suggested Citation

Hass, Lars Helge and Johan, Sofia A. and Müller, Maximilian A., The Effectiveness of Public Enforcement: Evidence from the Resolution of Tunneling in China (July 27, 2013). Journal of Business Ethics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2494203

Lars Helge Hass

Lancaster University - Management School ( email )

Bailrigg
Lancaster, LA1 4YX
United Kingdom

Sofia A. Johan

Florida Atlantic University - Finance ( email )

777 Glades Rd
Boca Raton, FL 33431
United States

Tilburg Law and Economics Center (TILEC) ( email )

Warandelaan 2
Tilburg, 5000 LE
Netherlands

Maximilian A. Müller (Contact Author)

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany

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